Wind-down normalises news messages for investors

Over the past few years it’s been tricky at times getting a day-to-day reading on the mood of overseas markets because the main one, Wall Street, was having trouble coping with conflicting messages.

There was so much interpretation of the economic numbers that it seemed no one was sure whether bad news was good news, good news was bad news or even if bad news was bad news.

Normally, no news is good news. And in some cases, good news is actually good news. But as the Federal Reserve pumped trillions of dollars to help kick-start the world’s largest economy, sharemarket investors began to cheer any poor economic data amid the hope that even more money would be printed.

That meant bad economic news was good news for shares.

Indeed, for a while there the data didn’t really seem to matter at all – anything that kept the central bank liquidity tap on was good news.

Then, when the data was on the positive side (that is, good news for the economy), investors got nervous and sold shares, fearing the Fed would stop the printing presses.

In this bizarro world, good economic news was then bad news for shares, despite the well-worn theory that a robust economy eventually leads to more jobs, more spending and higher earnings.

But now it appears that investors are getting comfortable with the idea that the massive monetary policy stimulus program is starting to be unwound.

Related Quotes

Company Profile

That means investors can get back to the more normal mindframe where upbeat economic data, or good news, really is good news for shares and bad news for bonds.

There’s no doubt that over the longer term, good economic news is good news for sharemarkets and if all goes to plan this year investors won’t have to live in this in-between environment where they are exposed to significant risks of policy errors.

Investors will be hoping that the bears are wrong about Wall Street being propped up and that when the Fed is done it will collapse like a house of cards.

Despite some weaker than expected employment data in the United States, investors are heading into 2014 with a new-found confidence across the economy.

Rate rises in the US are years away, but it does mean real bond yields will go back to more normal levels and growth continues to recover in the US, which will be good for housing, jobs and consumer confidence.

The likelihood of a hard landing or debt spiral in China might also dissipate, and eventually the market prices in a monetary policy “exit".

Of course, things never go to plan so easily.

Take the Australian dollar this past week, which is tipped to fall much further as the Fed tapers its bond-buying program.

Earlier in the past week it was fetching as high as US90.54¢, but on Friday it was closer to US88.20¢. That should have been good news for stocks with large US-dollar revenues and earnings, but although CSL was up 3 per cent, James Hardie was flat along with Amcor, Cochlear was down 1 per cent, Resmed lost 4 per cent, while Brambles shed 2.4 per cent in a market that was flat for the week.